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R anjeet K unwar
Value A dde d T A X
Background of VAT
VAT was initiated first in France in mid-1950s, then in European countries in 1960s and subsequently introduced in about 130 countries, including several federal countries. In Asia, it has been introduced by a large number of countries from China to Sri Lanka. Even in India, there has been a VAT system introduced by the Government of India for about last ten years in respect of Central excise duties. Value added tax is an indirect tax charged on sale of goods. Before the implementation of Value Added Tax, Sales tax was charged on sales. Sales tax was levied at first point of sale, and the resellers did not contribute to the Government. Government was losing huge revenue due to this system. Finally Government introduced VAT on 1st April 2005, with the motto of uniformity in tax structure and to reduce the evasion of tax.
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1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458
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VAT
works on the principle that when raw material passes through various manufacturing stages and manufactured product passes through various distribution stages, tax should be levied on the 'Value Added' at each stage and not on the gross sales price. is charged as a percentage of prices, which means that the actual tax burden is visible at each stage in the production and distribution chain.
It is a consumption tax because it is borne ultimately by the final consumer and not by companies. It This
ensures that same commodity does not get taxed again and again and there is no cascading effect. In simple terms, 'value added' means difference between selling price and purchase price. VAT avoids cascading effect of a tax.
It is collected fractionally, via a system of deductions whereby taxable persons can deduct from their
VAT liability the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.
Basically, VAT is multi-point tax, with provision for granting set off (credit) of the tax paid at the earlier
stage. Thus, tax burden is passed on when goods are sold. This process continues till goods are finally consumed. Hence, VAT is termed as 'consumption based' tax. VAT works on the principle of 'tax credit system'.
Each State has made changes as per their needs. Though basic concepts are same in VAT Acts of
all States, provisions in respect of credit allowable, credit of tax on Capital goods, credit when goods are sold inter-state are not uniform. Even definitions of terms like business', 'sale', 'sale price', 'goods', 'dealer', 'turnover', 'input tax' etc. are not uniform. Schedules indicating tax rates on various articles are also not uniform, though broadly, the schedules are expected to be same. Manufacturer Supplier of Raw Material Input Rs. 100 Sale to Manufacturer Rs. 100 Value Added Rs. 50 VAT Payable @ 4% Rs. 4 Sale to Wholesaler Rs. 150 VAT @ 4% Rs. 6 Less: Input Tax Credit Rs. 4 Customer VAT payable Rs. 2 Gross Value of Purchase Rs. 300 Government Add: VAT @ 4% Rs. 12 VAT Collection= Total Purchase price Rs. 312 Rs. 4+ 2+ 4+ 2= Wholesaler Retailer Rs. 12 Input Rs. 150 Input Rs. 250 Value Added Rs. 100 (which is actually Value Added Rs. 50 Sale to Retailer Rs. 250 borne by the Sale to Customer Rs. 300 VAT @ 4% Rs. 10 Customer) VAT @ 4% Rs. 12 Less: Input tax credit Rs. 6 Less: Input tax credit Rs. 10 VAT Payable Rs. 4 VAT Payable Rs. 2 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458
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Advantages of VAT
1. Coverage: It offers all the economic advantage of a tax that includes the entire retail price within its scope. Direct payment of tax is spread out over a large number of firms instead of being concentrated on particular groups such as wholesalers and retailers. If retailers do evade tax, tax will be lost only on their margins. One particular advantage is that of the widening of the tax base by bringing all transactions into tax net. 2. Revenue Security: VAT represents an important tool against tax evasion and is superior to a business tax or a sales tax from the point of view of revenue security. If payment of tax is successfully avoided, at any particular stage of production and distribute on cycle nothing will be lost if the tax is picked up at a later stage. And even if it is not picked up subsequently, the Government would have at least collected the VAT paid at stage previous to that at which the tax is avoided. On the other hand if evasion takes place under sales tax, the Government looses all the taxes due on the product. A significant advantage of the value added tax in any country is the cross audit feature. Tax charged by one firm is reported as a deduction by the firms buying from it. 3. Selectivity: VAT may be selectively applied to specific goods or business entities. In addition, VAT does not burden capital goods because the consumption type VAT provides a full credit for the tax included in purchase of capital goods. The credit does not subsidize the purchase of capital goods it simply eliminates the tax that has been imposed on them. 4. Co-ordination of VAT with direct taxes. Most tax payers cheat on their sales, not to evade VAT but to evade personal and corporate income tax. Thus operations of an effective VAT, in implementation greatly help income tax administration and revenue collection. Other important advantages of VAT are: 1. 2. Uniform rates of VAT will boost trade activities and will create a favorable atmosphere for the expansion and economy. VAT Helps amassing tax revenues to finance the fund necessary for socio-economic growth of the economy. It has the in-built capacity to raise more tax revenues without altering the existing tax structure and is yet able to expand the tax-base. Since VAT is mostly based on 100% self-assessment, it will reduce the taxpayers hazards to visit tax offices frequently and lead to better tax compliance. It became easier to give tax concessions to goods used by common man or goods used for manufacture of capital goods or exported goods. Since there is no tax on tax, price escalation is avoided and will make prices more competitive with the foreign counterparts. This matter is very important in present era of globalization and economic liberalization.
3. 4. 5.
6.
The VAT will therefore help common people, traders, industrialists and also the Government. It is indeed a move towards better efficiency, healthy competition and fairness in the taxation system. 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 4 Phone 47665555 (30Lines), 9811136987, 9811042458
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Disadvantages of VAT
It will be a virtual crime not to look for the other side of the coin of the Indian VAT System. Main disadvantages that have been identified in connection with VAT are as follows: 1. VAT is regressive. It is claimed that tax is regressive i.e. its burden falls disproportionately on the poor since the poor are likely to spend more of their income than a relatively richer person. 2. VAT is inflationary. VAT is too difficult to operate from the position of both the administration and business. Some businessmen seize almost any opportunity to raise prices and the introduction of VAT certainly offers such an opportunity. However, temporary price controls are a result of the careful setting of the rates of VAT. 3. VAT favors the capital intensive firm. It is argued that VAT has a direct impact on the tax of the labour-intensive firms compared to the capital-intensive firms. Since the ratio of value added to selling price is greater for the former, this is a real problem for labour intensive economies and industries. 4. Powers given to Sales tax inspectors: In order to give effect to the various provisions of the VAT legislation more powers have been given to sales tax inspectors. This may cause harassment to the assesses of VAT. This may even lead to return of "Inspector Raj" which will play havoc and might lead to corruption in the system. 5. Central Sales Tax: Central Sales tax is a major issue connected with the implementation of Value Added Tax in our country. There is a need to phase out CST and move to completely destination-based tax system. It is a very difficult task as it is an important source of revenue for government.
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There are certain requirements which have to be completed for claiming Set-off. 1. Set-off to be allowed only to a Registered Dealer. On purchase for manufacturing /Trading/ Works contract/Lease, set-off can be claimed by Registered Dealers. A Registered dealer can avail set off on purchases of the following: a) b) c) d) e) 2. Raw materials, parts, Components, Spares. Fuel Trading goods Packing Material Capital asset A valid TAX INVOICE is must to claim set-off. A registered dealer, selling any goods, must issue to the purchaser a TAX INVOICE containing following particulars, and retain a copy there of for three years from the end of the year in which sale is booked. a) b) c) d) e) f) g) 3. The word Tax Invoice in bold letter at the top or prominent place. Name, Address and Registration Number of Selling Dealer. Name and Address of the Purchasing Dealer. Serial Number and Date Description, Quantity and Price of the goods sold. The amount of Tax charged, to be shown separately. Signed by the selling dealer or a person authorized by him.
Maintenance of Account: Every Registered dealer shall keep and maintain true and correct account of daily transaction showing goods produced, manufactured, bought and sold, value thereon together with invoice and bills. Along with all these details all VAT dealers are required to keep following records. a) VAT account: This can be maintained manually or computerized. VAT account should contain details of Input and Output tax, Debit note and credit note issued/ received during the period. b) Purchase Records: Proper accounting of all purchases in a chronological order stating therein the date on which the goods so purchased, the name and registration number of the selling dealer, tax invoice number and date, the amount of purchase price and amount of tax paid separately should be maintained. c) Sales Register: Sales register should contain Tax Invoice number, name and address thereof, Total sale value, exempted sales- such as consignment sales/ sock transfer, etc. All copies of invoice should be retained in serial number.
Debit Notes and Credit Notes Register: Copies of the Debit note and Credit note issued / received are to be recorded in a book and should be filed separately under different rates of tax in the same manner as that of st 1/53, 1 Floor, Lalita Park, Laxmi nagar, Delhi -92 6 Phone 47665555 (30Lines), 9811136987, 9811042458
d)
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purchase/sales register. The end result of debit/ credit note accounts are to be taken into account while adjusting monthly tax payable. e) Period of Retention of Accounts: All books and records shown above shall be retained by a dealer until the expiration of 5 years after the end of the year to which it relates or for such other period as may be prescribed. Set-Off of Input Tax Credit Credit will be available of tax paid on inputs purchased within the State. Credit will not be available of certain goods purchased like petroleum products, liquor, petrol, diesel, motor spirit (position of furnace oil is not clear in white paper, but many States do not give credit). No credit is available in case of Inter-State purchases. Set-Off of tax paid on capital goods Credit will be available of tax paid on capital goods purchased within the State. Credit will be available only in respect of capital goods used in manufacture or processing. The credit will be spread over three financial years and not in first year itself. There will be a negative list of capital goods [para 2.4 of White Paper on State-Level VAT] States has deviated from these provisions. In West Bengal and Kerala, it is available in 36 monthly instalments. In Karnataka, it is available in 12 monthly instalments, but value of capital goods should be minimum Rs 10 lakhs. Capital goods of value less than Rs 10 lakhs will be 'inputs' and immediate credit will be available. In Maharashtra, entire credit is available immediately. Instant credit Credit will be available as soon as inputs are purchased. It is not necessary to wait till these are utilised or sold [para 2.3 of White Paper on State-Level VAT]. No credit of CST paid - Credit of Central Sales Tax (CST) paid on inputs and capital goods purchased from other States will not be available [para 2.6 of White Paper on State-Level VAT]. This appears to be discriminatory and violative of Articles 303 and 304(a) of Constitution. Set-Off of Tax on opening stock as on 1st April 2005 Input tax as already paid on goods lying in stock as on the day when Vat was introduced (which are purchased within one year prior to that date) was available to dealer. For example, if Vat was introduced on 1-4-2005, credit of tax paid on stock lying as on 31-3-2005 was allowed if the goods were purchased on or after 1-4-2004. Detailed stock statement were required to be submitted to sales tax authorities. This credit will be available over a period of six months after an interval of 3 months need for verification [para 2.7 of White Paper on State-Level VAT]. States have deviated from these provisions. Very few sales tax forms Most of present sales tax forms will disappear, {para 2.14 of White Paper on State-Level VAT] However, forms relating to EOU/SEZ may continue. Forms under CST Act will continue.
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VAT does not require one to one i.e. Bill to Bill correlation between input and output. Credit is available as soon as inputs /capital goods are purchased. The credit can be utilised for payment of VAT on any final product. It is not necessary to wait till the input is actually consumed/sold.
b)
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Refund if VAT credit of input tax available cannot be utilised for any reason
Entire input tax will be refundable within three months, when final product is exported. In respect of sale to EOU/SEZ, there will be either exemption of input tax or tax paid will be refunded within three months [para 2.5 of White Paper on State-Level VAT]. If tax credit exceeds tax payable on sales, the excess credit will be carried to end of next financial year. Excess unadjusted credit at end of second year will be eligible for refund [para 2.4 of White Paper on StateLevel VAT] Such excess credit can arise when purchases of inputs are made locally, but final product is mainly exported or stock transferred to another State.
Rates of taxes under VATIdeally, VAT should have only one rate. Though this is not possible, it is certain that there should be minimum varieties of rates. Broadly, following VAT rates are proposed [para 2.18 and 2.19 of White Paper on State-Level VAT] 0% on natural and un-processed produces in unorganised sector, goods having social implications and items which are legally barred from taxation (e.g. newspapers, national flag). This will contain 46 commodities, out of which 10 will be chosen by individual States which are of local or social importance. Other commodities will be common for all States. Certain specified life saving medicines have been exempted from VAT tax. No VAT on Additional Excise Duty items (textile, sugar and tobacco) in first year. Position will be reviewed later. Vat has been imposed by State Governments @ 12.5% on tobacco products w.e.f. 14-2007. 1% floor rate for gold and silver ornaments, precious and semi-precious stones. 4% for goods of basic necessities (including medicines and drugs), all industrial and agricultural inputs, declared goods & capital goods. This will consist of about 270 commodities. 12.5% RNR (Revenue Neutral Rate) on other goods. 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458
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Aviation turbine fuel (ATF) and petroleum products (petrol, diesel and motor spirit) will be out of VAT regime. Liquor, cigarettes, lottery tickets, will also be taxed at a higher rate. These will have uniform floor rates for all States (generally 20%). Tax paid on these will not be eligible for input tax credit. Broadly, VAT rates of all States follow this pattern, but still there are many variations. For example, in some States, Vat rate on gold and silver ornaments has been reduced to 0.25%, as traders were facing competition from neighboring States. Kerala State has imposed tax @ 20% on some luxury goods, though tax on such goods should be @ 12.5% as per the white paper. In some States, hand tools are taxed at 4%, while in some States, these are taxed at 12.5%. Policy about turnover tax, surcharge, additional tax etc. imposed by State Governments - States were levying turnover tax, surcharge etc. on sales tax,. Those taxes on sale will go. However, Octroi and Entry tax (which is in lieu of octroi) will continue. Other type of Entry Tax will either be discontinued or will be made Vatable [para 2.16 of White Paper on State-Level VAT] .
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Variants of VAT
VAT could be levied with three specific Variants, (a) Gross Product Variant, (b) Income Variant, (c) Consumption Variants These variants could be further distinguished their methods of calculation, (i) Additional Method; (ii) Subtraction Method Gross Product Variant The gross product variant allows deductions for taxes on all purchases of raw materials and components, but no deduction is allowed for taxes on capital inputs. That is, taxes on capital goods such as plant and machinery are not deductible from the tax base in the year of purchase and tax on the depreciated part of the plant and machinery is not deductible in the subsequent years. Capital goods carry a heavier tax burden as they are taxed twice. Modernization and upgrading of plant and machinery is delayed due to this double tax treatment. Income Variant The income variant of VAT on the other hand allows for deductions on purchases of raw materials and components as well as on depreciation on capital goods. This method provides incentives to classify purchases as current expenditure to claim set-off. However in practice, there are many difficulties connected with the specification of any method of measuring depreciation, which basically depends on the life of an asset as well as on the rate of inflation. Consumption Variant Consumption variant of VAT allows for deduction on all business purchases including capital assets. Thus, gross investment is deductible in calculating value added. It neither distinguishes between capital and current expenditures nor specifies the life of assets or depreciation allowances for different assets. This form is neutral between the methods of production, there will be no effect on tax liability due to the method of production (i.e. substituting capita] for labour or vice versa). The tax is also neutral between the decision to save or consume. Among the three variants of VAT, the consumption variant is widely used. Several countries of Europe and other continents have adopted this variant. In our Country generally income variant is adopted. The reasons for preference of Consumption variant are: It does not affect decisions regarding investment because the tax on capital goods is also set-off against the VAT liability. Hence, the system is tax neutral in respect of techniques of production. The consumption variant is convenient from the point of administrative expediency as it simplifies tax administration by obviating the need to distinguish between purchases of intermediate and capital goods on the one hand and consumption goods on the other hand. In practice therefore, most countries use the consumption variant. Also, most VAT countries include many services in the tax base. Since the business gets set-off for the tax on services, it does not cause any cascading effect. 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458 (a) Direct Subtraction method (b) Intermediate Subtraction method (c) Indirect Subtraction method
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Documentation required to avail credit of tax paid on inputs and capital goods
Tax credit will be given on basis of document, which will be a 'Tax Invoice', cash memo or bill. Such invoice can be issued only by a registered dealer, who is liable to pay sales tax. The invoice should be serially numbered and duly signed, containing prescribed details. The tax payable should be shown separately in the Invoice. The dealer should keep counterfoil/duplicate of such invoice duly signed and dated [para 2.8 of White Paper on State-Level VAT] In case of manufacturer, Invoice issued under Central Excise Rules should serve purpose of VAT also, if the invoice contains required particulars. Dealers availing composition scheme shall not show any tax in their invoice. They are not entitled to any credit of tax paid on their purchases. Debit note and credit note If sale price is increased/reduced subsequent to sale, the transaction will be recorded through proper debit/credit note. The buyer will adjust the input credit available to him accordingly. Records and Accounts Each State has prescribed records to be maintained. Broadly, following records will be required. Records of purchases of Inputs. Record of debit notes and credit notes. Quantity record of inputs. Record of credit notes received from supplier. Record of capital goods. Sale register and tax charged on sales. Record of Tax credit available Monthly/quarterly totals of the following should be taken - (a) Input credit available (b) Credit available on capital goods (c) Credit notes from suppliers. Carry forward/refund of tax credit If input tax credit cannot be utilised in a particular month/ Year, the credit can be carried forward and used in subsequent months/year. Refund of such excess credit is permitted only if goods were exported out of India. If credit is not utilised in two years, refund will be granted. Preservation of records Since assessment can be opened for prescribed period (usually five to right years), it is necessary to preserve all relevant records for prescribed period from close of the financial year. The records can be audited by departmental audit party.
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XXX
plus (b) Reversal of Credit (On exempted goods, stock transfers, free samples, lost inputs) XXX Less (c) Input tax credit available (XX) Net Tax Payable This net amount is required to be paid through prescribed challan on or before due date.
Assessment of TAX
Dealer is required to assess his tax and pay himself. It will be basically self-assessment. There will be no compulsory assessment at end of the year. If notice is not issued within prescribed time, dealer will be deemed to have been self-assessed [para 2.12 of White Paper on State-Level VAT] Returns will be filed monthly/quarterly, as prescribed, along with challans. Returns will be scrutinised and if there is technical mistake, it will have to be rectified by dealer [para 2.11 of White Paper on State-Level VAT]
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As per West Bengal VAT Act, if dealer does not receive any intimation within two years from end of the accounting year, it is deemed that his return has been accepted by sales tax authority. In case of Andhra Pradesh, the time limit is four years from date of filing of return. Audit of records - There will be audit wing in department and certain percentage of dealers will be taken up for audit every year on scientific basis. The audit wing will be independent of tax collection wing, to remove bias. There will be cross verification with Central Excise and Income Tax also, [para 2.13 of White Paper on State-Level VAT] Audit by outside Agencies - VAT laws of some States provide for audit by outside agencies. AP Vat Act provides for audit by CA, cost Auditor or Sales tax Practitioner (STP), if audit is ordered by Commissioner. In Karnataka, audit report is required if turnover exceeds Rs 25 lakhs. In Delhi, the dealer is required to submit copy of audit report u/s 44AB of Income Tax Act (This report is required when turnover exceeds Rs 40 lakhs per annum) No separate audit is prescribed, unless special audit is ordered by department. In Maharashtra, audit report from Chartered Accountant or Cost Accountant is required if sales turnover exceeds Rs 40 lakhs.
Question: 1: Compute the invoice value to be charged and amount of tax payable under VAT by a dealer who had purchased goods for Rs. 1,20,0000 and after adding for expenses of Rs.10,000 and of profit Rs. 15,000 had sold out the same. The rate of VAT on purchases and sales is 12.5%. compute the VAT payable. Solution: Purchase price of goods Add: Expenses Add: Profit margin Amount to be billed Add: VAT @ 12.5% Total invoice value Invoice value to be charged 1,20,000 10,000 15,000 1,45,000 18,125 1,63,125 18,125 (15,000) 3,125
VAT to be paid VAT charged in the invoice Less: VAT credit on input 12.5% of Rs. 1,20,000 Balance VAT payable Question: 2:
Manufacturer A sold product X to B of Delhi @ Rs. 1000 per unit. He has charged CST @ 4% on the said product and paid Rs. 60 as freight. B of Delhi sold goods to C of Delhi @ Rs. 1250 per unit and charged VAT @ 12.5%. C of Delhi sold goods to D, a consumer @ Rs. 1500 per unit and charged VAT @ 12.5%. Compute the VAT payable by B and C. B Liability of VAT Cost of product X purchased from Mumbai Rs. 1000 + 40 (CST) + Rs. 60 (Credit of CST shall not be allowed under VAT) Sale price VAT payable Rs. 1,100 1,250 156.25
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Value Added Tax C Liability of VAT Purchase price exclusive of VAT VAT credit to be taken Sale price VAT payable @ 12.5% VAT credit allowed Net VAT payable
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Rs. 1,250 156.25 1,500 187.50 (156.25) 31.25
Demerits:
1. VAT does not cover service 2. Floor rate:- State will have no discretion to go below or above the prescribed rates. 3. Non-Integration of CST with State VAT (no credit of CST from output VAT) 4. No refund / setoff if final product is exempt. 5. Accounting burden 6. General rate (Revenue neutral rate i.e. 12.5%) is too high.
Variants of VAT
1. Gross product variant 2. Income Variant 3. Consumption Variant
Rates of VAT
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0% = Goods having social implication and items which are legally barred from taxation (e.g. new paper, national flag etc.). This will contain 46 commodities. 10 will be chosen by state (local and social important). Other will be common for all States. 1% = Gold and silver ornaments, precious semi-precious stones. 4% = Goods of basic necessities. This consist 270 commodities. 12.5% = RNR on other. Note: Petrol, diesel and motor spirit, Aviation Turbine fuel, Liquor, cigarettes, lottery tickets are kept outside VAT. The States may or may not bring these commodities under VAT laws. However, it is agreed that all these commodities will be subject to 20% floor rate of tax
Registration:
1. Every dealer who is liable to pay VAT shall get himself registered. 2. TIN (Tax payers Identification Number): It is registration number. It consists of 11 digit numerals. First 2 are state code and next nine are based on State. 3. If assessee fails to obtain registration under the VAT Act, he may be registered compulsorily by the Commissioner. In this case Commissioner may assess the tax due on the basis of evidence and dealer shall liable to pay such tax. Further he shall be lived penalty for failure to get registration. 4. Dealer otherwise not eligible for registration may also obtain registration and if Commissioner is satisfied that the business of dealer requires registration, he may allow registration. 5. Cancellation: The registration can be cancelled on: a. Discontinuance of business b. Succession of business c. Transfer of business from one to another state. d. Registered dealer has ceased to be liable to pay tax.
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Limitation: There are difficulties connected with the specification of any method of measuring depreciation, which basically depends on the life of an asset as well as on the rate of inflation.
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all
Consumption Principle: Variant Consumption variant of VAT allows for deduction on business purchases including capital assets. Gross investment is deductive in calculating value added.
It neither distinguishes between capital and current expenditures nor specifies the life of assets or depreciation allowances for different assets.
Merits: (a) It does not affect decisions regarding investment because the tax on capital goods is also set off against the VAT liability. Hence, the system is tax neutral in respect of techniques of production (labour or capital intensive). (b) Convenient from the point of administrative as it simplifies tax administration by obviating distinguish between purchases of intermediate goods on the one hand and consumption goods hand. expediency the need to and capital on the other
Limitation: The system is tax neural from the view point Government as it leads to loss of revenues to the Government.
of
Question 2.
General Requirements for VAT System: 1. Compulsory issue of tax invoice and retail invoice: Tax invoice is issued to a dealer/consumer who has to take input VAT Credit whereas retail invoice is meant for inter-state sales or sale to a consumer who does not require input credit of VAT. Registration: There is a compulsory registration of the dealer if the aggregate turnover exceeds a certain specified limit. Composition scheme: A small dealer whose turnover does not exceed a specified limit (say in Delhi Rs. 50 lakhs) can opt for composition scheme where he shall have to pay tax himself at a small percentage of gross turnover and in this case buyer of goods with not get input VAT Credit. Tax payer identification Number (TIN): There will be a taxpayer's identification number of 11 digit numerical which will be unique to each dealer. Simplified returns of VAT are to be filed monthly or quarterly as specified by each state. Self-assessment by dealers. Audit under VAT has been made compulsory by various States. No requirement of any declaration form as bill will be raised for each sale and VAT shall be levied.
2.
3.
4.
5. 6. 7. 8.
Question 3: What are the methods for computation of VAT? The various methods of computation of VAT are:
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Suitability: This method is mainly used with income variant of VAT. Demerits: (a) This method does not easily accommodate exemptions of intermediate dealers. (b) It does not facilitate matching of invoices for detecting evasion. (c) Computation: Step 1: Aggregate all the factor payments including profits to arrive at the total value addition. Step 2: Apply the rate on Step 1 to calculate the tax.
Invoice Method
Salient features: (a) The most important aspect of this method is that at each stage, tax is to be charged separately in the invoice. (b) This method is also called the "Tax Credit Method" or "Voucher Method". Merits: (a) In this method the beneficiary is the trade and Industry because the tax collection at all stages is very much lesser than the tax received by the State because of the availability of set-off of tax paid. (b) The possibility of tax evasion is reduced to minimum, because credit can be Subtracti Suitability: This method is normally applied where the tax is not charged separately. claimed only when purchase invoice is produced. on Computation: Method Salient Compute Step 1: Features: the tax to be imposed at each stage of sales on the entire sale (a) value. Tax is charged only on the value added at each stage of the sale of goods (b) Set-off the tax credit as the total value of goods sold of purchases in Step 2: There is notax paid at the earlier stage, (i.e., at the stage is not taken into set-off).account. Methods of differential tax is paid. Step 3: The determination of value added: (a) Direct Subtraction method: Value added = Total value of sales exclusive of tax Less: Total value of purchases exclusive of tax. (b) Intermediate subtraction method: Value added = Total value of sales inclusive of tax. Less: Total value of purchases inclusive of tax. (c) Indirect Subtraction Method Question 3. What are the transactions not eligible for input tax credit? Computation: Step 1: goods (a) Sale of exemptedCompute the value added under either of the above methods. Step 2: Apply the rate of tax on the amount calculated in step1.
(b) (c)
purchase of goods from outside the State goods purchased in the course of business, but used for personal facility of proprietor, partner or director goods damaged in transit goods stolen, destroyed or lost goods sold in the course of inter-state sale without support of C form goods transferred to outside the State for sale either by branch or agent without support of Form F 20
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(h)
goods returned
Can a dealer claim Input Tax Credit for goods sold in Inter-State trade?
Question 4.
Yes. It can be claimed only when those sales are effected to the Registered dealers of other State against Form C.
Question 5. Whether claim of input tax credit is on a one to one basis?
No. The tax paid on purchases in a period can be deducted from tax payable on sale, whether such goods is sold or not during that particular period.
Question 6. Will there be Input Tax Credit for all purchases?
No, It will be available only for local purchases from registered dealers, but not on goods taken for self-use/given as samples, gifted, lost in theft, fire, damaged or destroyed/all automobiles including two wheelers, three wheelers and their spare parts for repair or maintenance, air-conditioning units, refrigerators.
Question 7. What is meant by Capital Goods?
Capital goods are, in general, the movable assets like Plant and machinery used in industry, for manufacture of goods, but do not mean goods (stock-in- trade) for sale.
Question 8. What are Capital Goods under the VAT Act?
Capital goods" means, plant, machinery, equipment, apparatus, tools, appliances or electrical installation for producing, making, extracting or processing of any goods or for extracting or for bringing about any change in any substance for the manufacture of final products; b) Pollution control, quality control, laboratory and cold storage equipment; c) Components spare parts and accessories specified at (a) and (b)=above; d) moulds, dies, jigs and fixtures, e) refractors and refractory materials, f) tubes, pipes and fittings thereof; and g) Storage tanks.
a)
used in the State for the purpose of manufacture, processing, packing or storing of goods in the course of business excluding civil structures and such goods as may be notified by the Government.
Question 9. How the Input Tax Credit-has to be claimed and availed for Capital Goods?
Every registered dealer while submitting monthly returns to the assessing authority/can claim the Input Tax Credit paid for all local purchases made from registered dealers on the basis of Original Tax Invoices in those returns itself for Capital Goods, after the commencement of commercial production. They can deduct the same from the Output tax, if any, payable on the local sales or inter-State sales in those monthly returns. In the first year of commencement of commercial production, 50% of the input tax credit not exceeding 50% can be availed and the rest in the second or third year.
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Value Added Tax Question 10. When the input tax credit has to be reversed?
FCA
R anjeet K unwar
Input tax credit was availed but subsequently the related goods have been stolen or damaged or destroyed. (2) Input tax credit was claimed but subsequently it has been detected that related purchases are from bogus traders (bill traders). (3) Input tax credit was availed but related goods have been given as free sample or gift to others.
(1)
Input tax credit availed but subsequently the related goods are used to provide facility to the proprietor / partner / director of the concern.
Question 11. How will the refund be issued to the exporters (dealers who effect zero rate sale)
The dealer who claims refund due to zero rate sales may file an application in Form D1 to the assessing authority along with copies of the purchase invoices of related goods. After verification the assessing authority will issue refund within 90 days from the date of receipt of application in Form D1. If the excess amount is not refunded within ninety days, whatever may be the reason, the assessing authority will issue refund along with interest at the rate prescribed in the Act. If the dealers do not claim refund within 180 days from the date of export or before the end of the financial year, whichever is later, the amount to be refunded shall lapse to Government.
Problem 1: Methods of Computation VAT - Inputs taxable at different rates Inputs used for the production of Output 'M' are 'X' and V respectively. The following are details of inputsInput Product X Product Y VAT Rate 12.5% 4% Invoice Price (inclusive of vat) 45,000 26,000
The following are the details of Sales and the rate of VAT applicable for the Output 'M' is 12.5%. Description A to B B to C C to D D to E Rs. 2,25,00 E to Consumer Rs. 2,70,000
From the above details, Calculate the VAT collected at each stage and the VAT finally remitted using the two different methods i.e. (a) Invoice Method. and (b) subtraction Method. Solution: (a) Invoice Method: Particulars (1) Inputs for A Product X (@ 12.50%) Product Y (@ 4%) Invoice (2) Material Value (3) Vat (4) Input Tax Credit (5) Net (6)
45,000 26,000
40,000 25,000
5,000 1,000
5,000 1,000
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FCA 76,500 1,12,500 1,80,000 2,25,000 2,70,000 2,70,00 68,000 1,00,000 1,60,000 2,00,000 2,40,000 2,40,000 8,500 12,500 20,000 25,000 30,000 30,000
R anjeet K unwar
2,500 4,000 7,500 5,000 5,000 30,000
Sale by A to B Sale by B to C Sale by C to D Sale by D to E Sale by E to Consumer Final B. Subtraction Method Particulars 1 On Input Sale by A to B Sale by B to C Sale by C to D Sale by D to E Sale by E to Consumer Final
(Amount in Rs.) Input Tax Credit 5= 4 X 12.50/112.50 6,000 610 4,000 7,500 5,000 5,000 28,110
Inference: In the above illustration, total collections under Invoice Method and Subtraction Method differs due to differences in rates of VAT on inputs and outputs. Problem 2: Compute the invoice value to be charged and amount of tax payable under VAT by a dealer who had purchased goods for Rs. 1,20,000 and after adding for expenses of Rs. 10,000 and of profit Rs. 15,000 had sold out the same. The rate of VAT on Purchases and sales is 12.5%. Solution : Step 1 : Computation of Invoice Value Particulars Cost of goods Purchased Add: Additional expenses Add: Profit Share Total Invoice Value Rs. 1,20,000 10,000 15,000 1,45,000
Step 2: Computation of Tax payable Particulars VAT on Invoice Value @ 125% Less: Input Tax Credit VAT on purchases @ 12.5% (1,20,000 X 12.5%) VAT Payable Rs. 18,125 (15,000)
3,125
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FCA
R anjeet K unwar
Mr. Ram a dealer purchased 11,000 kgs. of inputs on which VAT paid @4% was Rs. 4,000. He manufactured 10,000 kgs of finished products from the inputs. 1,000 kgs was the process loss. The final product was sold at uniform price of Rs. 10 per Kg, as follows Goods sold within State 4,000 kgs. Finished product sold in Inter-state sale against C form 2,500 kgs. Goods sold to Government departments outside the State 500 kgs. Goods sold to unregistered dealer outside the State 1,000 kgs. Goods sent on stock transfer to consignment agents outside the State 2,000 kgs. There was no opening or closing stock of inputs, WIP or finished product. The State VAT rate on the finished product of dealer is 12.5%. Calculate the VAT liability and CST. Find VAT credit available to dealer and tax required to be paid in cash. Problem 4: suppose in previous question, if 2,000 kgs were exported instead of stock transfer. What would be the tax liability and credit available?
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FCA
R anjeet K unwar
VAT charged in invoice 27,500 Less: VAT input credit (2,25,000 x 12.5)/112.5 25,000 VAT payable by Mr. A 2,500 Q.3: How can an auditor play role to ensure that the tax payers discharge their tax liability properly under the VA T system? 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458
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Value Added Tax Q.4: Discuss the 'subtraction method' for computation of VAT. Ans to Q 3:
FCA
R anjeet K unwar
(3 Marks each)
Under the VAT system, trust has been reposed on tax payers, as there will be no regular assessment of all VAT returns, but only a few VAT returns will be taken up for scrutiny assessment. In other cases, the return filed by the trader will be accepted. It will not be also seen whether proper records have been maintained by the trader. As a consequence, a check on compliance becomes essential. Chartered Accountants can ensure tax compliance by:(i) (ii) (iii) (iv) (v) helping the client in systematic record keeping; helping the client in interpretation of the provisions of VAT law, and performing audit of VAT accounts. reporting the under-assessment, if any, made by the dealer requiring additional payment or reporting any excess payment of tax warranting refund to the tax payers.
Ans to Q.4: Under the subtraction method, the tax is charged only on the value added at each stage of the sale of the goods. Since, the total value of goods sold is not taken into account, the question of grant of claim for set-off or tax credit does not arise. This method is normally applied where the tax is not charged separately. Under this method for imposing tax, 'value added' is simply taken as the difference between sales and purchases. -------------------------------------------------------------------------------------------------------------------------------------------------------------
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FCA
R anjeet K unwar
(iii) purchase of goods as may be notified by the State Government; (iv) purchase of goods where the purchase invoice is not available with the claimant or there is evidence that the same has not been issued by the selling registered dealer from whom the goods are purported to have been purchased; (v) purchase of goods where invoice does not show the amount of tax separately; (vi) purchase of goods, which are being utilized in the manufacture of, exempted goods; (vii) goods in stock, which have suffered tax under an earlier Act but under VAT Act they are covered under exempted items; (viii) purchase of goods used for personal use/consumption or provided free of charge as gifts (partial credit is available in the State of Maharashtra); (ix) goods imported from outside the territory of India (commonly known as high seas purchases); (x) goods imported from other States viz. inter-State purchases. Note: Any three points can be given in the above answer ------------------------------------------------------------------------------------------------------------------------------------------
PCC 2008May
Q.1: Briefly explain the income variant of VA T. (2 marks) Q.2: What is the demerit of VA T from the view point that it is a form of consumption tax? (2 marks) Ans to Q.1: Income Variant of VAT The income variant of VAT allows for deductions of purchases of raw materials and components as well as depreciation on capital goods. This method provided incentives to classify purchases as current expenditure to claim set-off. In practice, however, there are many difficulties connected with the specification of any method of measuring depreciation, which basically depends on the life of an asset as well as on the rate of inflation. Ans to Q.2 : Demerit of VAT VAT is a form of consumption tax. Since the proportion of income spent on consumption is larger for the poor than for the rich, VAT tends to be regressive. However, this weakness is inherent in all the forms of consumption tax. While it may be possible to moderate the distribution impact of VAT by taxing necessities at a lower rate, it is always advisable to moderate the distribution considerations through other programmes rather than concessions or exemptions, which create complications for administration. Q.3: What are the different stages of VAT? Can it be said that the entire burden falls on the final consumer? (3 Marks) Q.4: Briefly explain how VAT helps in checking tax evasion and in achieving neutrality. Ans to Q. 3 : Different Stages of VAT The Value Added Tax (VAT) is a multistage tax levied as a proportion of the value added (i.e. Sale minus purchase) which is equivalent to wages plus interest, other costs and profits. In an economy, apart from the manufacturers and final consumers, there would be wholesalers and retailers also. The wholesaler might supply to retailer, and each one of them could supply to the manufacturer and the end consumer. VAT will be collected at each stage, and wherever applicable, the manufacturer or retailer will claim input credit. 1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458 (3 marks)
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FCA
R anjeet K unwar
Thus, VAT is collected at each stage of production and distribution process, and in principle, its entire burden falls on the final consumer, who does not get any tax credit. Thus VAT is a broad-based tax covering the value added to each commodity by parties during the various stages of production and distribution. Ans to 4: No Tax Evasion It is said that VAT is a logical beauty. Under VAT, credit of duty paid is allowed against the liability on the final product manufactured or sold. Therefore, unless proper records are kept in respect of various inputs, it is not possible to claim credit. Hence, suppression of purchases or production will be difficult because it will lead to loss of revenue. A perfect system of VAT will be a perfect chain where tax evasion is difficult. Neutrality The greatest advantage of the system is that it does not interfere in the choice of decision for purchases. This is because the system has anti-cascading effect. How much value is added and at what stage it is added in the system of production/distribution is of no consequence. The system is neutral with regard to choice of production technique, as well as business organisation. All other things remaining the same, the issue of tax liability does not vary the decision about the source of purchase. VAT facilitates precise identification and rebate of the tax on purchases and thus ensures that there is no cascading effect of tax. In short, the allocation of resources is left to be decided by the free play of market forces and competition. -------------------------------------------------------------------------------------------------------------------------------------------
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FCA
R anjeet K unwar
Invoice method is the most common and popular method for computing the tax liability under 'VAT' system. Under this method, tax is imposed at each stage of sales on the entire sale value and the tax paid at the earlier stage is allowed as set-off. In other words, out of tax so calculated, tax paid at the earlier stage i.e., at the stage of purchases is set-off, and at every stage the differential tax is being paid. The most important aspect of this method is that at each stage, tax is to be charged separately in the invoice. This method is very popular in western countries. In India also, under the VAT law as introduced in several States and Central Excise Law, this method is followed. This method is also called the 'Tax Credit Method' or 'Voucher Method'. Q.5: What are the different variants of VA T and how is deduction available for tax paid on inputs including capital inputs? (3 x 3 = 9 Marks) Ans: There are three variants of VAT viz, gross product variant, income variant and consumption variant. Gross Product Variant: Under this variant, deduction is allowed for tax paid on all inputs excluding capital inputs. Income Variant: Under this variant, tax paid on non-capital inputs and depreciation on capital inputs is allowed. Consumption variant: Under this variant, deduction is allowed for tax paid on all business inputs including capital inputs.
1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458
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FCA
R anjeet K unwar
1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458
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FCA
R anjeet K unwar
Ans to example 4 : VAT output:12.5% of 2,00,000 Less: VAT input 5% of 1,50,000 VAT payable Ans to example 5: VAT output 12.5% of 1,92,857 Less; VAT input 5% of 1,42,857 VAT payable = 24,107 =(7,143) = 16,964 = 25,000 = (7,500) 17,500
1/53, 1st Floor, Lalita Park, Laxmi nagar, Delhi -92 Phone 47665555 (30Lines), 9811136987, 9811042458
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